It’s hardly a secret that I’m critical of current monetary policy and large-scale asset purchasing programmes. As I’ve discussed before it is bad for individuals, particularly the young and working class, and the broader economy as it is harmful to competition. That said, I’m fairly moderate in my beliefs in that I believe these problems can be amended with good policy, a topic I will hopefully return to when I’ve thought of some more concrete fixes. I’ve noticed that there’s a group of people who, while also critical of current monetary policy, believes that the Great Recession was just the beginning and that we’ve not fixed any of the structural problems. The argument goes that by sweeping the problems under the rug and help the economy to recover by printing money and buying assets the central banks are, as I alluded to in the title, are patching up a bullet wound with a band-aid. Notable people who belong to this camp includes Peter Schiff famous for The Peter Schiff Show Podcast among other things and Martin Sundquist, founder of Lynx asset management.
While the opinions and theories of what will come as a consequence of ignoring structural issues in the hope of it going away differ there are some common threads. Usually it’s thought that there will be a loss of confidence in current economic and financial institutions like central banks, the US dollar, or the concept of fiat currency. Schiff argues that the rest of the world is subsidising the US economy by buying and using dollars despite the fact that the US can just print more, undermining the value of the dollar. This will in Schiff’s view eventually lead to the rest of the world realising that the buying of US government bonds encourages bad fiscal behaviour. Schiff also thinks that the current central bank policy incentivises borrowing more, which leads to many borrowing more than they can handle, creating a bubble which will eventually burst.
Sundquist was on Börspodden recently where he explained his views of the crisis, heavily influenced by the Fourth Turning theory. For those of you who haven’t encountered the fourth turning theory it states that American history functions in a cycle of roughly 80-100 years which is broken down in to four phases, called turnings, which defines the generation which becomes adults during it. Sundquist expects that 2008 was the kick-off for the current cycle’s fourth turning which is the crisis turning. He foresees a crisis of confidence in fiat currency which might lead to the reinstating if commodity currency.
Are the scenarios described above likely? No but it’s certainly interesting to think about. I’d rather like to highlight some of the problems these analyses focus on. For example, people taking on too much debt while credit is cheap is a real problem which can have serious consequences if interest rates increase. As for what will happen, we’ll just have to wait and see. If you enjoyed this blog post come back next Sunday for another. You can also check out other blog posts here and follow my Twitter here.
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